Unequal exchange

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Unequal exchange is a much disputed concept, used preferably in Marxian economics but also in ecological economics to denote forms of exploitation hidden in, or underwriting trade. Originating, in the wake of the debate on the Singer-Prebisch thesis, as an explanation of the falling terms of trade for underdeveloped countries, the concept was coined in 1962 by the Greco-French economist Arghiri Emmanuel to denote an exchange taking place where the rate of profit has been internationally equalised, but wage-levels (or those of any other factor of production) have not. It has since acquired a variety of meanings, often linked to other or older traditions which perhaps then raise claims to priority.

In the works of Paul Baran, and subsequently adopted in the dependency approach of Andre Gunder Frank, there is a related but distinct concern with the transfer of values due to superprofits. This did not refer to the terms of trade, but to the transfer taking place within multinational corporations (called "monopolies"). Versions of unequal exchange originating within the dependency tradition are commonly based on some such concern with monopoly and center-periphery trade in general. Here, if unequal exchange occurs in trading, the effect is, that producers, investors and consumers incur either higher costs or lower incomes (or both) in the buying and selling of commodities than they would have, if the commodities had traded at their “real” or "true" value. In that case, they are disadvantaged in trading, and their market position is worsened, rather than strengthened. On the other side, the beneficiaries of the trade obtain a superprofit. This term implies that the beneficiaries of unequal exchange are capitalists or entrepreneurs, whereas as understood by Emmanuel the beneficiaries are the high-wage country consumers or workers.

The most renowned of those adopting the term is Samir Amin, who tried to link it to his own argument on the interdependent uneven development of rich and poor countries. Ernest Mandel also adopted the term, although his theory was based rather on that of the East-German Marxist Gunther Kohlmey. The most common approach within Marxism is to talk about unequal exchange whenever unequal labour values are being exchanged (e.g., John Roemer), and this type of approach has then been elaborated in recent decades by ecological economists, based instead on, e.g. ecological footprints or emergy.

Depending on definition, the historical occurrence of unequal exchange can be traced to anything from the origins of trade itself, not limited to the capitalist mode of production, to the origins of significant international wage-differentials, or to the post-war appearance of a significant net-inflow of raw-materials to the developed countries. In the approach of Immanuel Wallerstein the origins of the modern world-system, or what others, such as Ernest Mandel, would call the rise of merchant capitalism, is said to have entailed unequal exchange, although the idea was criticised by Robert Brenner.

Another aspect of these theories is the criticism of fundamental assumptions of Ricardian and neoclassical theories of comparative advantage, which could be taken to imply that international trade would have the effect of equalising the economic position of the trading partners. More generally, the concept was a criticism of the idea that the operation of markets would have egalitarian effects, rather than accentuating the market position of the strong and disadvantaging the weak.

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[edit] Basic definition

The basic principle of unequal exchange can be described simply as "buying cheap and selling dear", in such a way that a commodity or asset is bought either:

  • below its real value, and sold at a higher value, or
  • at its real value, but sold above its real value, or
  • above its real value, and sold at a price even higher than its already inflated acquisition cost (e.g. stockmarket).

This practice was already known and described in medieval times and earlier, and it led to theories of a “just” or “fair” price for products. The idea surfaces again nowadays in controversies over fair trade. However, in modern neoclassical economics, the notion of a morally justifiable price is regarded as unscientific; at most one can talk about an “equilibrium price” in an open, competitive market. If the value of a good is equal to the price someone is prepared to pay for it, no exchange can be unequal.

Anyone can claim to have been "cheated" or shortchanged in exchange, in the sense of receiving an "unfair" price for a commodity, less than it is really worth, or having to pay more than it is really worth. The crucial question which must be answered therefore is what the "real value" of commodities actually is, what their real worth is, and how that could be objectively established. A related question is why the "victim" traded at a lower price, when he could have gotten a higher price elsewhere.

This question preoccupied social philosophers and economic thinkers for many centuries. It contributed to the "moral science" of political economy, which was originally concerned with the problem of what would be a fair and just exchange, and how trading could be regulated in the interests of a more harmonious progress of human society.

In modern thought, however, value in economics is regarded as a purely subjective matter--it can be judged only on the basis of how an individual actually lives his life and how he conducts himself as an individual in the marketplace. The only “objective” aspect that remains is the price at which a commodity sells or is purchased, and this becomes the foundation for modern economic science.

So in modern economics, value is essentially a question of style, moral behaviour and the spirituality of individuals, not an economic issue. If unfair trading practices occur, it must be that there is an impediment to freely competitive markets; and if those markets or market access could be open, all would be fair. Fair competition is said to be guaranteed through:

  • free access for all to the market place, and
  • a legal and security framework which protects traders from being cheated and robbed.

In that case, the concept of "unequal exchange" can only refer to unfair trading practices, such as:

  • not getting an equal opportunity of access to the market,
  • illegal trading practices, ranging from plunder, robbery and theft, to extortion or price mark-ups which are against the law.

By implication, unequal exchange is not itself viewed here as an economic process, because if open market access and market security exist, then trade is equal and fair by definition - it is equal because everybody has the same access to the market, and it is fair because just laws and their enforcement ensure that this is so. Another way of saying this is that if citizens have equal rights and equal opportunity, there cannot be any unequal exchange, except if citizens behave in immoral ways.

[edit] Illustrations of unequal exchange

  • "Today slippers produced in China at a cost of $2 and delivered to San Diego at $3, retail at $10, and dominate the American market. What is significant is that 70% of the low ultimate price goes not to the Chinese producers (workers and capitalists) but to the American distributors. And that price spread by its very magnitude engenders further, often still greater spreads, right into the speculative financial level." [1]
  • An exporter from Guilin, China advertised: “Now, We have a huge stocks of approximate 530000 pairs of shoes, include tennis shoes, sport shoes, children shoes, flying shoes, etc. We want to clear these stocks, the minimum FOB price will be only US$ 0.70 a pair, and you may discuss these prices with us if your purchase quantity is big.” These shoes may sell for US$35 in the United States. In this example, the wage of the worker making the shoes is less than 2 % of the final consumer price. (Source: Liu, Henry C.K. (2001), Communication to internet forum pkt@csf.colorado.edu, 12 December 2001).
  • In the coffee trade Central America to Europe, the wage of the coffee plantation worker was found to be 5% of the final consumer price: Wage of worker in coffee plantation 5.1%; Payment to owner of coffee plantation 8.5%; Exporter – Middleman 3.7%; export tax 17.2%; overseas freight 1.4%; duty 1.8%; Coffee tax 18.4%; Value-added tax 6.1 %; Importer 7.6%; cost of roasting 6.5%; Retailer 23.7%; Retail price in Europe 100% (Source: Launer, E. (1992) Datenhandbuch Sud – Nord. Goettingen: Lamuv, p. 143).
  • In the banana trade of Central America to Germany, the cost structure for 6 bananas retailing at 1.26DM was found in 1990 to be as follows: Plantation worker 0.01%; Plantation owner 22.2%; United Fruit Co 37.6%; freight company 25.6%; German railway 3.3%; retailer 11.2% (Source: Launer, E. (1992) Datenhandbuch Sud – Nord. Goettingen: Lamuv, p 147).
  • when a dozen shirts were exported from a Bangladesh garment factory to the USA, the cost structure in US dollars was found in 1992 to be as follows: Materials and accessories (imported) $27; Depreciation on equipment $3; Wages $5; Net industrial profit $3; Factory price (one dozen shirts) $38; Gross mark-up $228; Retail price (per dozen) in the West, before tax $266; Retail price including sales tax (10 percent)$292.60 (Source: Chossudovsky 2003, p. 83)

For more examples, see Cem Somel, [2] "Commodity chains, unequal exchange and uneven development", ERC working paper, September 2004.

[edit] Unequal exchange in Marxian economics

Karl Marx aimed to go beyond moral discussion, in order to establish what, objectively speaking, real values are, how they are established, and what the objective regulating principles of trade are, basing himself principally on the insights of Adam Smith and David Ricardo (but many other classical political economists as well). He was no longer immediately concerned with what a "morally justified price" is, but rather with what "objective economic value" is, such as is established in real market activity and real trading practices.

Marx's answer is that "real value" is essentially the normal labour cost involved in producing it, its real production cost, measured in units of labour time or in cost-prices. Marx argues that the "real values" in a capitalist economy take the form of prices of production, defined as the sum of the average cost price (goods used up + labour costs + operating expenses) and the average profit reaped by the producing enterprises.

Formally, the exchange between Capital and Labour is equal in the marketplace, because, assuming everybody has free access to the market, and an adequate legal-security framework exists protecting people against robbery, then all contractual relations are established through free and voluntary consent, on the basis of juridical equality of all citizens before the law. If that equality breaks down, it can only be, because of immoral behaviour by citizens.

But Marx argues that, substantively, the transaction between Capital and Labour is unequal, because:

  • some economic agents enter the market with large assets they own, as private property, while other enter the market owning very little at all, except their capacity to do work of various kinds. That is to say, the bargaining power and bargaining positions of economic agents are differentially distributed, and this means, that private accumulation of capital occurs on the basis of appropriating surplus labour, either the surplus labour of the workers whom the owner of capital assets hires, or the surplus labour of workers hired by another owner of capital assets.
  • external to the market, goods are produced by workers with a value in excess of labor-compensation, appropriated by the owners of productive capital assets. Marx's reference to unequal exchange refers therefore both to unequal exchange in production, and unequal exchange in trade.
  • another type of unequal exchange is a corollary of the tendency of the rate of profit to equalize under competitive conditions, insofar as producers obtain the ruling market prices for their output, irrespective of the different unit labor-costs of different producers of the same product.

In Das Kapital, however, Marx does not discuss unequal exchange in trade in detail, only unequal exchange in the sphere of production. His argument is that unequal exchange implied by labour contracts, is the basis for unequal exchange in trade, and without that basis, unequal exchange in trade could not exist, or would collapse. His aim was to show that exploitation could occur even on the basis of formally equal exchange.

Marx however also notes that unequal exchange occurs through production differentials as between different nations. Capitalists utilized this differential in several ways:

  • by buying a product produced more cheaply in another nation, and selling it at home or elsewhere for a much higher price;
  • by relocating the site of production to another nation where production costs are lower, because of lower input costs (wage costs and materials/equipment supply costs). That way, they pocketed an extra profit.
  • by campaigning for protective tariffs shielding local industry from foreign competition.

That, Marxian economists argue, is essentially why the international dynamic of capital accumulation and market expansion takes the form of imperialism, i.e. an aggressive international competition process aimed at lowering costs, and increasing sales and profits.

As Marx put it,

"From the possibility that profit may be less than surplus value, hence that capital [may] exchange profitably without realizing itself in the strict sense, it follows that not only individual capitalists, but also nations may continually exchange with one another, may even continually repeat the exchange on an ever-expanding scale, without for that reason necessarily gaining in equal degrees. One of the nations may continually appropriate for itself a part of the surplus labour of the other, giving back nothing for it in the exchange, except that the measure here [is] not as in the exchange between capitalist and worker." [3]

The overall effect is that, as Marx believed, in the trade between nations, more work exchanges for less work - the richer the rich become, the more capital assets they have to make additional claims to wealth from somewhere else, and the poorer the poor become, the more work they actually have to do to obtain an equivalent amount of products for production or consumption. The end result of that situation is rising debts. Because if the exploitation through unequal exchange has become extreme, it is no no longer possible to generate sufficient income through production to pay off all the claims on that production, and the only way in which production can be maintained at all, is through credit.

[edit] Empirical indicators of unequal exchange

  • the terms of trade. This refers to the relative prices of goods and services traded on international markets, specifically the weighted average of a nation's exports relative to its import prices, as indicated by the ratio of the export price index to the import price index, measured relative to a base year.
  • Accounting analysis of product unit values, i.e. the composition of the various costs included in the final market price of a commodity (the price to the final consumer who uses or consumes the product). If for example it is found that an increasing fraction of that sale price represents costs other than direct production and transport costs, but instead profit, interest and rent income, then unequal exchange in trade has probably increased. But because of the "creative" gross and net income & expenditure accounting that is done, this is often not easy, since various incomes and expenditures are included under headings which make it difficult to understand what the costs were actually for, or what activity gave rise to the incomes.
  • The change in the shares of net income between social classes and groups. If the discrepancy between the gross and net incomes of one social class, relative to another social class, increases, then a transfer of claims to wealth is occurring. This could be due to less income generated in production, or to income transferred in exchange (trading), or to taxation. We can compare also the actual average labour hours put in by one social class, the net income accruing to that social class.
  • The trend in the cost structure of production of a country as a whole, or particular sectors, which refers to the amount of capital expenditures not directly related to the actual production of a product, i.e. costs incurred in addition to materials, equipment and labour (interest payments, incidental expenses, insurance, taxes, rents and the like).
  • The contribution to net output and investment by the FIRE sector (Finance, Banking, Real Estate, Insurance, Renting and Leasing), and the expenditure on capital goods by type by different sectors.
  • The proportion of net profits, net rents, net interest payments and net property income transferred to other nations or obtained from other nations, such as is shown for example by the discrepancy between GDP and GNI and by Balance of Payments data, and the difference between imports and exports of goods and services.

[edit] Possible sources of unequal exchange

  • in production on the basis of formally equal exchange, because the employer can buy labour power at its value (its reproduction cost) while living labour forms a product during production which contains a new value added larger than the outlay on wages, resulting in the realisation of a gross income which contains a surplus value, i.e. the gross profit. This surplus-value did not result from what happened in exchange, but from what happened in production.
  • in the labour market itself, simply because labour power can sell above its value or below its value. If labour power sells above its value, employers complain of excessive wage demands, and if superexploitation occurs, workers complain of unfairness in remuneration and unfair distribution of incomes and wealth.
  • in the exchanges between capitalists; in the process of sales of output and the formation of average market prices, an unequal exchange occurs among different capitalists, since the surplus labour expenditures in their own enterprises are effectively unequally rewarded. That is to say, mostly the surplus-values realised and privately appropriated by individual enterprises do not correspond directly to the surplus labour performed within those enterprises, they are above or below those surplus-labour expenditures.
  • in the manipulation of money, credit and insurance conditions (the cost of borrowing capital and business risk) principally through the money supply, interest rates, and insurance costs. In other words, financial capital may "squeeze" production capital, in a manner similar to a primeval form of capital, usury capital. Currency exchange rates may strongly favour one country over another in foreign trade.
  • more generally, unequal exchange between different economic sectors, such that sector A must produce and sell an increasing amount of output over time, in order to purchase an equal amount of inputs from sector B, simply reflecting here the uneven development of different sectors which results in productivity differentials and the uneven development or shifts in market demand. In this case, we are talking about longer term modification in the price structure of output and the cost structure of production which systematically advantage one sector over another.
  • through monopolisation, monopsony, oligopoly etc. Monopoly and competition logically imply each other, since, part of the meaning of competition is not just the attempt to market a product produced at a lower production cost, but also the attempt to block competitors or disadvantage their market position at the point of production and in sales, thus protecting one's own profits and reaping additional profits through increased market shares. Monopolisation can occur in all kinds of ways: through direct plunder, having privileged access to resources, through ground rents and technological rents, through centralisation and concentration of capital, through state regulations, through processes such as "professionalisation" which restrict access to semi-skilled or skilled occupations to preserve or drive up remuneration through rules of inclusion and exclusion, and so on.
  • through the taxation system, where tax revenue obtained from workers' gross wages is transferred by the government back to the capitalists, to stimulate additional investment. The government can use taxes to increase the rate of surplus value, both by giving capitalists an extra hand-out in some way, and by shifting state expenditure further to the advantage of capitalists and to the disadvantage of monetary and non-monetary benefits received by wage-earners.
  • in the sphere of consumption through manipulating consumer credit, through artificially raising prices for certain consumer goods, but also through cheapening wage-goods by importing cheaper wage-goods for another country, for example.
  • In foreign trade, various methods can be used to exploit differentials in labour productivity and currency exchange rates, quite apart from transfer pricing, protectionism and tax evasion. Whatever the case, the international result is that producers of country A must produce and export more and more of an output in order to purchase an equivalent amount of imports from country B, as reflected in the longer-term trend in the "terms of trade".
  • Direct cheating in exchange and criminal transactions in commercial activity which violate legal principles of fair competition, such that goods are bought below their accepted real value and/or sold above their real value.
  • Ascriptive discrimination (institutionalised, mainly negative social status based on ascriptive criteria, e.g. sexism, religious discrimination, ethnic discrimination, racist discrimination, elitist exclusivism causing cultural enclosures, market segmentation, and ghetto-isation).

[edit] Criticisms of the concept of unequal exchange

Broadly, six main criticisms can be distinguished:

The first criticism of the concept of unequal exchange is that, even although it may be proved to occur, this of itself has no specific moral or policy implication. "Unequal" does not necessarily imply "unfair". Reference is made here to human choice: if somebody choses to buy or sell above or below what a product is really worth, that is their own choice, and they only have themselves to blame, if they get a bad deal.

The second criticism is that even although unequal exchange can be proved to occur, it is preferable to no trade at all. At least if trade occurs, everybody can gain something from it, even if it means some gain more than others. If that is accepted by all parties to the trade, it cannot be morally wrong. It may be that a good purchased in one country fetches a much higher price in another, but in good part that higher price is due to the costs involved in the trading process as such. Traders aim to sell goods as competitively as they can, and if the final price is comparatively high, there is not much they can do about that.

This argument is, extended with the idea that people have to learn to "trade up the ladder". Yes, the starting position may be one of inequality, but by "trading up" it is possible to "get even" over time, i.e. over time it is possible to improve one's market position, perhaps with the aid of credit. Inversely, a "trickle down effect" is said to occur whereby the enrichment of some through trade will improve the position of others less fortunate over time. Trading problems should therefore be viewed in terms of a process of development over time, whereby market actors gradually improve their position.

The epistemic criticism revolves around the idea that it is impossible to specify objectively what a fair or equal exchange would be anyway; any such judgement is regarded as either subjective, or biased in favour of some group or other. Any economic exchange will be "unequal" from some point of view.

Fifth, it is argued that if unequal exchange exists, that is only because some groups or countries took the initiative to trade and generate wealth. That gave them an advantage or privileged starting position, sure, but they achieved it through their own initiative, and they justly deserve the benefit of that.

Finally, it is argued that the market will spontaneously balance itself over time anyway, since, if some group feels hard done by and disadvantaged in trade, they will band together to drive up the price of what they sell in the competitive marketplace. Thus, the market will ultimately adjust to what goods and services are really worth, and market imperfections or rigidities will be ironed out through the process of market competition itself.

All these arguments illustrate that market trade supplies no specific moral norms of its own, beyond the obligations necessary to settle transactions. If one is "free to choose" in market trade, one is also able to choose freely what morality to follow, within an accepted or enforced legal framework. Those moralities might clash, but there may exist no neutral arbiter that can adjudicate: it may be that "between equal rights, force decides".

The typical response to these criticisms is that one may be forced to buy or forced to sell, even just for survival - whether one likes that or not, and under unfavourable conditions. Thus, it may be impossible ever to reach the position of fair or equal exchange, except through non-market interventions. That is, market trade could be liberating, but it could just as well be very oppressive. If the rich/poor gap widens constantly, and terms of trade deteriorate constantly, the idea of "trading up the ladder" or "trickle down effects" is seriously undermined.

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(Thanks to G. Köhler for material used this article)